Previous studies have shown that regulated firms tend to diversify for different reasons than unregulatedones. This is the case for product but also for geographical diversification, i.e. international expansion.The logic generally advanced is that regulated firms tend to diversify when they face costly and difficultrelationships with the regulatory authority in charge of their sector. This approach, however, does notexplain 1 what is really at the core of the problem in regulated firms’ relationships with regulators, 2why these firms cannot overcome part of the problem by developing nonmarket strategies –lobbying,campaign contributions, etc.– to influence regulatory decisions, and 3 why they sometimes opt forinternational expansion rather than product diversification. In this paper, we propose a theoretical modelthat provides potential answers to these questions. We start by considering the firm-regulatorrelationship as an incomplete information problem, in which the firms know things that the regulatordoes not, but can cannot convey hard information about these things. In this setting, we show that whenfirms face tough nonmarket competition domestically, going abroad can create a mechanism that makesinformation transmission credible and therefore strengthen their position in their home market.International expansion, in consequence, can be a way to solve some of the problems that regulated firmsface at home in addition to a way for these firms to grow their business abroad.

Item Type: MPRA Paper -

Original Title: International expansion, diversification and regulated firms- nonmarket strategy-